Running out of money in retirement is one of the top retirement worries among Americans. It can be a scary moment when you go from getting a regular paycheck to relying on your savings for income. Unfortunately, the transition isn't as easy as flipping a switch and magically transforming your savings into an income stream.
Retirement income planning requires, well, planning. You want to carefully consider the various sources and strategies available to create a sustainable income stream. Let's take a look at some of the most effective retirement income options and how they can fit into your portfolio.
Maximize Social Security benefits
Social Security is a part of the income of nearly 90% of people aged 65 and older. But it accounts for only about 30% of their total income streams. While Social Security is one of the most reliable income sources, many people don't make the most of what it has to offer.
The easiest way to ensure you're maximizing your Social Security benefit is to delay claiming it. You first become eligible for Social Security at age 62, but you'll get a reduced benefit if you claim before your full retirement age. This is between the ages of 66 and 67, depending on when you were born.
If you keep waiting, your benefit amount will continue to grow. Each year you wait until age 70, you'll get an 8% increase. That's essentially a guaranteed 8% pay raise for each year. You'll then receive that increased benefit amount for the rest of your life. Once you turn 70, the increases stop, so there's no sense in delaying any longer.
One thing to be aware of if you do postpone claiming Social Security is that your Medicare coverage may also get delayed. This could increase your overall cost, so consider applying for Medicare even if you aren't taking Social Security yet.
Use annuities
Annuities sometimes get a bad reputation for hidden fees, but they can actually be great sources of sustainable income in retirement.
Annuities are insurance products that can provide guaranteed income streams for as long as you or your spouse live. The only other products that can promise this are Social Security and pension plans. But since most companies no longer offer pensions, buying an annuity with part of your retirement savings is the next best thing.
There are several different types of annuities and riders you can purchase to customize them. Some of the most common terms to be aware of include:
- Accumulation phase: The period when you are contributing to your annuity before it begins making payments.
- Payout phase: When you start taking income from your annuity.
- Deferred annuities: Annuities that delay payment until a predetermined future date.
- Fixed annuities: Annuities with a fixed, guaranteed payment amount.
- Variable annuities: Annuities that are invested in stocks, bonds or other investments of your choosing during the accumulation phase and thus may fluctuate in annual returns. The payments can be fixed or variable.
- Additional features or benefits you can add onto your annuity contract, such as stepped-up death benefits for your loved ones.
Given the complexity of annuities, it's important to work with a financial professional you trust to design the right product for you.
Utilizing your company's pension plan
If you are among the lucky few to have access to a pension, utilizing your company's plan is a great way to generate sustainable income in retirement. Pensions are typically paid as either an annuity or lump-sum.
With an annuity, you'll usually receive monthly payments for the rest of your life. With a single life annuity, you’ll only receive payments for as long as you live. A joint-and-survivor annuity, however, would provide benefits for the duration of your and a chosen beneficiary's lives.
If you receive your pension as a lump sum, you'll need to decide what to do with it next. You usually have three options when taking a lump-sum pension: receive cash, roll it into another employer-sponsored retirement plan or roll it into an individual retirement account (IRA). Note that if you take it as cash, you'll need to pay ordinary income taxes on it. But once it's in your hands, you can turn it into a guaranteed income stream by purchasing an annuity.
If you're worried that your pension plan may run out of money, the federal Pension Benefit
Guaranty Corporation (PBGC) probably has you covered. It will step in to pay the benefits you're owed if your plan is insured by the PBGC.
Investing for income
The previous retirement income strategies have focused on generating regular income that you can count on. Social Security, annuities and pensions can all pay a predictable and fixed amount. But there is another type of retirement income worth considering: variable income.
Variable income can fluctuate in value. One month you may get $1,000 and the next, $800. While this may sound like a bad thing, it can actually work in your favor. The third month, it could be $1,200, and 10 years from now it could be $2,000. It also gives you the option to reduce or increase your income when you choose.
You can create variable income streams from investments like bonds and dividend-paying stocks. Bonds are more dependable for income, but stocks have the added benefit of capital appreciation. This can be important in helping ensure your savings keep up with inflation throughout retirement. You may want to work with a financial advisor to help you strike the right balance of risk and reward in your investment portfolio.
Combining income sources for sustainability
Every source of retirement income has its benefits and drawbacks. This is why the best retirement portfolios often combine a bit of everything. One way of doing this is to choose enough regular income sources to ensure your daily living expenses are covered. Then use variable income sources as a supplement so you can take that trip to Greece or to visit your grandkids.
Ultimately, every retirement income plan is as unique as each retirement. It's up to you to find the right asset mix for you and your golden years.
_______________
Matt Schulz is the Chief Credit Analyst at LendingTree and has been covering the personal finance space for more than a decade. He is a nationally recognized expert on credit cards, “buy now, pay later” loans, personal loans, credit scoring and reporting, small business lending and other aspects of personal finance. He’s been quoted in or appeared on Good Morning America, NBC Nightly News, The Wall Street Journal, The New York Times and hundreds of other media outlets around the U.S. and the world. He is a graduate of the University of Texas and lives in Austin with his wife and son.
© 2024 Newsmax Finance. All rights reserved.